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What is the EAA and NPV for both companies? a Finally, Dominion Company is evaluating two mutually exclusive projects: The Pinto grinder involves an oudlay
What is the EAA and NPV for both companies? a Finally, Dominion Company is evaluating two mutually exclusive projects: The Pinto grinder involves an oudlay of $100,000, annual after-tax operating cash flows of $45,000, an after-tax salvage value of $25,000, and a three-year life. The Bolten grinder has an outlay of $125,000, annual after-tax operating cash flows of $47,000, an after-tax salvage value of $20,000, and a four-year life. The required rate of return is 10 percent. The net present value (NPV) and equivalent annual annuity (EAA) of the Pinto grinder are $30,691 and $12,341, respectively. Whichever grinder is chosen, it will have to be replaced at the end of its service life. The analyst is unsure about which grinder should be chosen. Bhm and his colleague Beth Goldberg have an extended conversation about capital budgeting issues, including several comments listed below. Goldberg makes two comments about real options: 1. "The abandonment option is valuable, but it should be exercised only when the aban- donment value is above the amount of the original investment 2. "If the cost of a real option is less than its value, this will increase the NPV of the investment project in which the real option is embedded." 41. Of the two grinders that the Dominion Company is evaluating, Bhm should recom- mend the: A. Bolten grinder because its NPV is higher than the Pinto grinder NPV. B. Bolten grinder because its EAA is higher than the Pinto grinder EAA. C. Pinto grinder because its EAA is higher than the Bolten grinder EAA
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